Even as companies begin to show signs of optimism in the state of the economy, and as the Fed announces the investment of a further $600 billion into quantitative easing, it is important for businesses to remember that the US banking markets are still at risk, and to manage that risk accordingly.
Of the more than 7,000 banks that make up the smaller banking market in the US, there have already been 139 failures this year, according to data from the FDIC, highlighting the importance of actively monitoring risk with your banking partners.
Whether companies are feeling good about the country’s economic prospects, or whether they take a very dismal view, it is important not to drop the ball now when it comes to banking counterparty risk management.
Says Nancy Atkinson, senior analyst at consultancy Aite Group: “What they [companies] need to be doing is really looking at bank relationships, making sure they are aware of the strength of their banks, demanding the same information from their banks as their banks do from them.”
Companies should be thinking of their bank deposits as they would any other type of investment and use similar risk assessment tools for managing deposits as they would use for managing an investment portfolio. This holds true for the other side of the picture as well—namely operational services for cash and treasury management.
In terms of banking partner as counterparties, this means having a clear picture of their financial strength and long-term viability.
This includes regular analysis of such things as:
- capital structure and adequacy ratios
- country risk and bank exposure to country risk (particular for international banking partners)
- outside indicators of strength—beyond simple credit ratings—such as CDS spreads
- franchise strength and earnings power
- access to liquidity and funding
- cost of funding